Investors to weigh Fed words for clues to future rate hikes

MARTIN CRUTSINGER

Mar. 16, 2016

WASHINGTON (AP) — The Federal Reserve has taken a wait-and-see stance since raising interest rates from record lows in December — waiting and seeing whether the U.S. economic picture warrants another rate hike.

After ending its latest policy meeting Wednesday, the Fed is widely expected to wait further. For how long, no one knows.

But investors will have more information to parse once the Fed issues a statement when its meeting ends and updates its economic forecasts and Chair Janet Yellen holds a news conference. The Fed's characterization of the U.S. and global economies and financial markets could provide clues to the timing and pace of future rate hikes.

In December, the Fed raised its benchmark short-term rate for the first time in nearly a decade — from near zero to a range of 0.25 percent to 0.5 percent. The increase signaled that Yellen and her colleagues felt the U.S. economy had finally strengthened enough 6½ years after the Great Recession ended to withstand higher loan rates.

But in the ensuing weeks, stocks and oil prices tumbled and China struggled to manage a sharp slowdown. Now, with stocks having regained most of their losses and with the U.S. job market improving and major overseas economies still-weak but stable, the Fed may be inching closer to raising rates again.

Just not this week. Most Fed watchers think the central bank wants more time to assess the financial landscape. Resuming its rate hikes too soon could slow growth or rattle investors again. The Fed is likely to give a nod to the improvements that have occurred since it met in January but also stress the uncertainties that loom.

On Tuesday, the government said retail sales slipped in February by 0.1 percent. And it said Americans spent less in January than it had previously estimated. The report suggested that consumer spending, which fuels two-thirds of economic activity, began 2016 on a lackluster note. Americans remained cautious about spending despite a solid job market and lower gas prices.

The weaker-than-expected retail spending led some economists to downgrade their forecast for growth during the January-March quarter. Barclays reduced its estimate of annualized economic growth to just 1.9 percent from a previous forecast of 2.4 percent.

"The retail sales report will only make it more difficult for those on the Fed who want to resume the tightening process," said Joel Naroff of Naroff Economic Advisors.

The Fed has two mandates: To maximize employment and keep prices stable. It has essentially met just one: In February, the United States added a robust 242,000 jobs — roughly the monthly average for the past six months. And the unemployment rate is a low 4.9 percent, close to the rate the Fed associates with full employment.

But inflation has been stuck below the Fed's 2 percent target rate for nearly four years. Too-low inflation tends to lead people to postpone purchases, which slows consumer spending, the economy's main fuel. Subpar inflation also makes the inflation-adjusted cost of loans more expensive.

Before further raising rates, the Fed wants to see more evidence that inflation is picking up. Its preferred inflation gauge did rise in January to a 12-month increase of 1.3 percent, faster than the scant 0.7 rise over the 12-month period that ended in December. But that's still well below the Fed's target and data released Tuesday showed that wholesale prices actually fell again in February.

Recent comments from Fed officials indicate that they differ on how to interpret inflation prospects.

Vice Chairman Stanley Fischer said last week that the Fed may "be seeing the first stirrings of an increase in the inflation rate — something that we would like to see."

Fischer suggested that two factors that have been depressing inflation — lower oil prices and a strong dollar, which reduces import prices — may be starting to wane.

But another Fed board member, Lael Brainard, said last week that she saw "troubling indications" that inflation could dip again. She also said she worried that weakness in China, Japan and other places could slow the U.S. economy.

In December, when the Fed raised rates, it signaled the likelihood of four additional hikes in 2016. But as market turmoil and global economic slumps escalated concerns, most analysts revised their predictions to two rate hikes this year, perhaps beginning in June.